Why the Rich Keep Getting Richer

There’s a recent headline making the rounds of late showing that the rich keep getting richer while the rest either tread water or fall behind.  Consider this recent report by Pew Research and I’ll share my thoughts below:

During the first two years of the nation’s economic recovery, the mean net worth of households in the upper 7% of the wealth distribution rose by an estimated 28%, while the mean net worth of households in the lower 93% dropped by 4%, according to a Pew Research Center analysis of newly released Census Bureau data.

From 2009 to 2011, the mean wealth of the 8 million households in the more affluent group rose to an estimated $3,173,895 from an estimated $2,476,244, while the mean wealth of the 111 million households in the less affluent group fell to an estimated $133,817 from an estimated $139,896.

This should not come as a surprise at all to anyone, nor should it be “shocking” or even create the anger and resentment that the typical MSM outlets use to foment class warfare.  See, this is completely to be expected and it has nothing to do with “fairness”, the rich not being taxed enough or attempts to hike the minimum wage, etc.  Here’s why:

Again, from Pew (I was going to say this before I even read beyond their headline, but they summed it up nicely):

These wide variances were driven by the fact that the stock and bond market rallied during the 2009 to 2011 period while the housing market remained flat.

Affluent households typically have their assets concentrated in stocks and other financial holdings, while less affluent households typically have their wealth more heavily concentrated in the value of their home.

Is This Fair?

Of course it is.  You can debate whether you think the rich should be paying even higher taxes than they do and since half the country doesn’t even pay any federal income tax, it’s tough to argue that the middle class and poor are “over-taxed”.  But that aside, regardless of the tax rate you levy upon well-off Americans, they’re still going to make the same investments – higher risk, higher returns.  Note that this report conveniently chooses as its starting point 2009.  That spring is when the stock market reached pivot bottom, so anybody invested in equities from early 2009 onward has seen their holdings virtually double in the years following. If minimum wage was an arbitrary $12 instead of what it is in your state, people at the lower end of the spectrum would broadly follow the same behaviors.  People tend to live up to their income, spend what they make (often more, incurring debt) and don’t invest in these same assets that the affluent do anyway.  Right, wrong or indifferent, the only way to get more Americans into the right gear is for them to earn more (which requires higher paying job creation, not the retail and service sector jobs this recovery is generating) and a change in behavior from consumption to investment.

Wealth Inequality Continues to Widen

This is a natural outcome of two broadly divergent situations: those with wealth who invest in positive-gain asset classes versus those with little to no investments where the only gains to net worth would come from real estate (which was stagnant at that time).  So, of course, we’d expect to see the wealth disparity widen.

Don’t forget that these wealthy individuals are also taking on risk by investing in stocks, bonds, real estate, and other alternative investments.  So, during a major stock market crash, you could tell a different story – the wealth gap shrinking, as again, middle and lower income Americans don’t see much change at all in their net worth while the affluent sample set sees their net worth decline dramatically.

So, in summary, these findings are not shocking or disappointing to me at all.  I’m not even in that top 7%, but I saw my net worth go way up since 2009 for the same reasons cited in the study.  I put away what I can in highly volatile, yet higher return asset classes since my time horizon is decades.

About Everyday Finance 67 Articles

The author has a background in Chemical Engineering and an MBA specializing in Finance and Biotech Management. Enamored by investing and saving since a teen, the author has been an advocate for optimized investment returns and strategies.

Visit: ETF Base, Darwin's Finance

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